HSBC keeps ‘buy’ on IndiGo, cites major headwinds but no structural damage—3 reasons why

As IndiGo continues to struggle to restore full operations after mass cancellations, some analysts argue the airline faces no lasting structural damage.

IndiGo faces strong headwinds from mass cancellations, some permanent cost burden and some reputational damage, but no structural damage is expected given the airline's continued cost advantage and muted capacity growth at its peers, according to foreign brokerage HSBC.

On Tuesday, aviation regulator DGCA ordered a 10 per cent cut in its winter schedule in view of its recent cancellations -- raised from an earlier 5 per cent. The private sector airline, which holds the lion's share in the market, has faced criticism for failing to plan for pilot rest period guidelines that took effect on November 1, impacting thousands of passengers. The situation prompted authorities to grant temporary relief in Flight Duty Time Limitations (FDTL) to IndiGo.

HSBC retains 'buy' on IndiGo, target suggests over 20% upside

HSBC has maintained its 'buy' call on InterGlobe Aviation with a Rs 943 cut in its target price to Rs 5,977. The target still implies a 20 per cent upside in the stock from its close on Tuesday, when the stock inched up 0.8 per cent after falling 16.8 per cent in seven trading sessions.

Here are three reasons that back HSBC's view:

No structural damage to cost advantage or market position: HSBC on IndiGo

According to the brokerage, IndiGo’s core strength remains intact as its long-term competitive advantage hasn’t eroded despite cancellations and temporary cost spikes from new FDTL norms. Its dominant domestic share and scale efficiencies still outclass rivals, it added.

FDTL-fuelled pain a one-off

New guidelines require airlines to deploy extra sets of pilots. "While the number of required pilots will be based on its network and fleet mix, we think this could increase staff cost between Rs 45 crore to Rs 90 crore, implying only 1.0 per cent increase to its unit cost per available seat kilometre (ASK)," wrote HSBC analysts in a research report dated December 9. ASK is a key metric that determines an airline's total passenger carrying capacity.

Branding and reputational impact contained

The report notes “some temporary reputational damage”, especially internationally after recent long-haul disruptions. "IndiGo recently started long-haul international operations, and is trying to improve its brand score in the international markets. These incidences could have a negative impact on IndiGo's reputation although the impact could be short-lived," HSBC analysts wrote.